S&P defends US downgrade

Standard & Poor's stuck to its guns after a withering attack on its math skills and historical accuracy in the wake of its stunning first-ever downgrade of the US credit rating.

worldUpdated: Aug 07, 2011 07:47 IST

AFP

Standard & Poor's stuck to its guns after a withering attack on its math skills and historical accuracy in the wake of its stunning first-ever downgrade of the US credit rating.

In what appeared to be an effort to undermine S&P's credibility and counteract any negative effects of the downgrade, White House and Treasury officials accused S&P of making a $2 trillion error and misreading basic data in cutting the rating of the world's largest economy to AA+ from triple-A.

Other critics have cited S&P's various upbeat assessments of companies and debt instruments weeks before they failed -- including the packaged mortgage securities that sparked the 2008 financial collapse.

S&P officials, however, refused to budge while acknowledging the error. "It doesn't really change the facts on the ground," S&P ratings head John Chambers told CNN.

"The facts on the ground (are) that the deal that we have, the Budget Control Act, is $2 trillion. It's going to take a deal about twice the size of that to stabilize the debt to GDP (ratio)," he said.

"Our figures that we published are accurate and our analysis is sound."

Late Friday, S&P followed through with its four-month-old threat to cut the US rating after what appears to have been tense discussions with US officials. S&P argued that the country's massive debt and its rising fiscal deficits meant it could not longer be included among the world's most risk-worthy sovereign borrowers.

It said last Tuesday's 10-year deficit reduction plan was insufficient and raised doubts about whether it would be fully implemented. But the ratings agency also stressed what it saw as the inability of the US political establishment to commit to an adequate and credible deficit reduction plan.

"We won't take a decision on whether the mix should be on the spending side or the tax side," Chambers told CNN, declining to weigh in on the debate between Republicans, who reject any revenue hikes, and Democrats, who want both spending cuts and new taxes.

The US Treasury said S&P had made "a basic math error of significant consequence" in reaching its conclusion on the trajectory of US debt over the next 10 years. S&P erroneously mixed up two different baselines for projecting US deficits, John Bellows, the acting assistant Treasury secretary for economic policy, wrote Saturday on the department's website.

If they had calculated correctly, he said, they would have measured $4 trillion in spending cuts over the next decade -- exactly what S&P had said was required to avoid a downgrade.

"Independent of this error, there is no justifiable rationale for downgrading the debt of the United States," Bellows wrote. "The magnitude of this mistake -- and the haste with which S&P changed its principal rationale for action when presented with this error -- raise fundamental questions about the credibility and integrity of S&P's ratings action."

David Beers, S&P's global head of sovereign ratings, defended the research that went into the decision and said the problem was not accounting errors, but the size of the US debt and the political paralysis in Washington.

"It really shouldn't surprise anyone that we have to look at the process under which government policy is made... The political risks carry a higher weight than the fiscal part of the equation," he said.

Some critics laid into S&P and its ratings brethren Moody's and Fitch -- both of which maintained their AAA ratings -- accusing the agencies of past failures that contributed to the 2008 financial meltdown.

"This is an outrage -- not because America is A-OK, but because these people are in no position to pass judgment," said Nobel Prize-winning economist Paul Krugman in his online blog for The New York Times.

Robert Reich, the secretary of labor under former president Bill Clinton, also bashed S&P's "intrusion" into US politics, saying "much of our current debt is directly or indirectly due to S&P's failures."

Billionaire Warren Buffett, whose Nebraska-based Berkshire Hathaway group owns more than $40 billion worth of now-downgraded US debt, said the S&P decision "doesn't make sense". "In Omaha, the US is still triple-A. In fact, if there were a quadruple-A rating, I'd give the US that," he told Fox Business News.